P2P CREDIT MARKETS

Insights from Person-to-Person Credit Markets

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 Obiettivo del progetto (Objective)

'Person-to-person credit markets have gained popularity in recent years. Their existence as an alternative to traditional credit markets is attractive considering the recent credit crunch. Yet, our knowledge of these markets is limited. The purposes of the research program offered in this proposal are twofold: first, I will provide answer to three open questions in the regulation of financial markets and in behavioral finance. Second, by addressing these questions, an understanding of the forces shaping alternative credit markets will be gained. In order to carry out the research program, I will utilize a new rich data set from Prosper - an online person-to-person credit marketplace operated in the US. The first part of the program focuses on the effects of interest rate restrictions. I exploit a behind-the-scene change in loan origination that suddenly increased the cap faced by some borrowers, but not by others. Given the nature of the change, I use differences-in-differences analysis to explore the effects of the cap on the access to credit, the price paid by borrowers and loan repayments. The second part of the program investigates lenders’ local bias – the preference for geographic proximity. I will quantify the extent of the bias, characterize the lenders that exhibit it, and evaluate whether it is driven by advantageous information. The third part of the program will inquire into lenders’ perception of non-verified information. Portion of the information lenders observe is unverified and potentially false. I will quantify whether the importance lenders assign to non-verified information change over the time they could communicate other potentially experienced lenders through a lenders’ online forum. The results from this research will benefit policy makers who need to know how the regulation they impose affect the marketplace, and what are the sources and the extent of the allegedly behavioral phenomena of local bias and the use in non-verified information.'

Introduzione (Teaser)

Much of the credit industry now operates online and impersonally. An EU study showed that interest rate caps are important, while also revealing bias towards non-local applicants.

Descrizione progetto (Article)

Traditional forms of credit have been supplemented by online credit brokerage. Now, brokers act as intermediaries between customer and lender, and receive fees from both parties.

Funded by the EU, the 'Insights from person-to-person credit markets' (P2P CREDIT MARKETS) project studied this environment. Running over a period of four years to September 2013, the project utilised new rich data from two large credit platforms: prosper.com and kiva.org. Areas of investigation included the effects of interest rate restrictions, whether the markets exhibit local bias and the value of non-verifiable information. Additionally, the project considered the effects of transaction costs and social distance.

Research revealed that higher interest rate caps increase the probability that a loan will be funded. This is especially likely if the borrower in question had previously been just outside the threshold. In the online environment, higher interest rate caps did not affect loan amounts and default probability, but the interest rate is slightly elevated.

The study also showed a strong local bias. A lender is more likely to lend to a nearby borrower, with chances of credit approval decreasing proportionally with distance. The trend was stronger with medium-risk borrowers. Project researchers proposed that comfort with familiarity is a plausible explanation for this.

Consistent with results, the study of verifiable information revealed that non-verifiable information affects lending decisions. The nature of the effect depends on the sentiment expressed in the information. For example, optimistic sentiment has a greater effect.

To test the role of transactional costs and social distance in decision making, the project submitted non-English loan applications either with or without translation. Relatively small transaction costs greatly reduce the share of loans given to speakers of languages other than that of the application. Social distance was found to have a lesser role.

The project's findings have been published in journal articles. As a result of the work, issues surrounding the online credit environment will become clearer.